CLIMATE SPECTATOR: Follow Apple’s strategy on solar

With Australia's only solar PV cell manufacturing plant closing, it's time we looked to the example of tech giant Apple to make the most of the great solar opportunity.

The news last week that Silex Systems will be closing Australia’s only solar PV cell and module manufacturing plant was sad to hear, but is not necessarily the bad news many may think.

The reality is that in spite of huge growth of solar PV over the last few years, manufacturing of solar panels and their silicon inputs has turned out to be far from a lucrative industry. Union leaders Paul Howes and Dean Mighell’s vision that Australia should be subsidising domestic manufacturing may well be a dead-end for renewable energy.

It may be that solar PV is the same as other physical products, such as information technology, where much of the profit and high value jobs are in sections of the value chain that aren’t involved in making stuff, but instead in areas like design, marketing, software and building the tools that go into the factories. With the notable exception of Intel, it is Apple, Microsoft and Google, who capture most of the economic value in the tech sector.

For solar PV this would involve specialising in the knowledge intensive rather than capital-intensive section of the solar PV industry: PV cell technology development and design, tools for enhanced manufacturing and quality control; and education services. And leaving others to compete over the slim margins in manufacturing.

In the last three years, European, Japanese and US solar PV manufacturers, in spite of established reputations and years of experience, have been getting slaughtered by cut-throat competition from new entrant Chinese manufacturers. While those outside the solar industry might like to think these Chinese manufacturers are winning through being cheap and nasty, those that are selling the biggest volumes – Suntech, Trina, Yingli, JA Solar, China Sunergy – all have reasonably good reputations for quality.

Achieving low costs in the solar sector is not so much about low labour costs and cutting corners, but low levels of materials wastage, quality control, and achieving high utilisation from expensive capital stock equipment.

In spite of good management, too many factories and not enough demand means the Chinese and not just the European, American and Japanese manufacturers are barely covering their costs. This oversupply is forcing manufacturers to squeeze out costs wherever they can through a range of incremental improvements.

These are all adding up to considerable overall reductions in the cost of solar PV modules within a relatively short period of time. But all of these cost reductions are just flowing through to customers as lower prices rather than improved margins for producers.

As usually happens when an industry faces mass oversupply of production capacity, anti-dumping tariffs become a popular defence. A few weeks ago the US government announced that it would be imposing an import tariff (referred to as a "dumping margin”) of around 31 per cent on silicon solar cells manufactured in China, or solar PV modules containing silicon cells manufactured in China.

Silicon solar cells are the key component of a solar module or solar panel which acts to convert sunlight into electricity. The US government has imposed this tariff on the basis that Chinese manufacturers of solar cells were ‘dumping’ solar cells into the US market – which is defined as selling the product at less than ‘fair value’.

Yet the interesting thing is that it looks as though rather than this helping US manufacturers, it will help the Taiwanese. Major Chinese PV companies have already started shifting their solar cell production to Taiwan and then incorporating these into Chinese assembled solar PV modules that they send to the US.

Another issue is that rather than helping encourage rationalisation of production capacity, which is ultimately what’s required to restore margins, these tariffs are allowing Taiwanese producers to remain in operation that would have potentially been up for closure.

At the same time, there is now pressure on the Europeans to follow the Americans and also impose anti-dumping tariffs on the Chinese. If this occurs then shifting production to Taiwan will reach its limits and Chinese producers will start to hurt.

All this national rivalry over the solar PV manufacturing prize is likely to mean cheaper solar panels for Australia, which is great.

But over the longer-term Australia’s best interests are likely to be in China succeeding. Leading Chinese solar PV producers: Trina, Suntech, Yingli, and China Sunergy all have C-suite executives trained by University of NSW. Also Swinburne, UNSW and ANU are providing assistance to several of these companies in developing new, and refining existing, solar PV technologies, such as Suntech’s new high-efficiency Pluto solar cell technology.

Australia could do very well out of solar PV without being a manufacturer but rather providing knowledge-intensive services to a Chinese manufacturing power-house. Such a capability is not made to order via a turn-key EPC contract and is very hard to replicate by competitors.

1300 880 160

IMPORTANT: This information has been prepared without taking into account your objectives, financial situation or needs and you should consider if the information is appropriate for you before making an investment decision. Unless otherwise specifically stated or disclosed (such as the InvestSMART Diversified Portfolios Product Disclosure Statement), neither InvestSMART Financial Services Pty Ltd nor any of its Related Companies make any recommendations as to the merits of any investment opportunity referred to in its emails or its related websites. Product disclosure statements for financial products offered through InvestSMART can be downloaded from this website or obtained by contacting 1300 880 160. You should consider the product disclosure statement before making a decision about the product. All indications of performance returns are historical and can not be relied upon as an indicator for future performance.